The biggest investment risk today for investors is to be underweight equities. The ASX Total Return Index as at the end of March, was down approximately 27% from it's January highs. This means for an investor who bought the high and held through the volatility, they would need to achieve a 37% return from the end of March to breakeven.
According to the Credit Suisse Global Investment Returns Yearbook 2020, Australia has been the highest equity returns in global markets on average since 1900. Achieving a 7% real return calculated in US dollars, compounded over a long time frame is not something that can be ignored by any investor, local or global. It is a testament to our relatively stable political environment, our natural resource endowment and our growing population; all of which bodes well for potential future returns.
Focusing on the present situation, we are clearly in an inflationary environment with widespread monetary and fiscal stimulus and support being provided by governments worldwide. In an inflationary environment, stocks are the only listed asset class that will provide a positive real rate of return; bonds and hybrids are vulnerable to the achievement of future negative real returns given interest rates are at their lowest rates in history. If you are a large investor who has been invested across asset classes, you have effectively have been made whole by the Australian government if you have had investments in local bonds and have sold. The next question in this instance would be: where to store your wealth to ensure it retains its purchasing power whilst achieving a nominal real rate of return?
Virtually all fund managers are cautious and under-invested holding larger than usual cash weightings. As we've seen in the past, the majority are usually wrong in a risk-off environment filled with the perception of uncertainty. If the market continues to grind higher it increases the risk of manager under-performance and consequent pressure from investors to increase market exposure to invest at higher equity values.
Another aspect to look at is could there be any news worse than what has transpired over the past 2 months? There is now significant data around the treatment and prevention of COVID-19. We know almost unequivocally that the elderly and obese with pre-existing conditions are highly susceptible whilst younger, healthy individuals have a relatively benign response to the virus. We believe that it's unlikely that COVID-19 will ever be fully eliminated for reasons beyond the scope of this article.
We expect societal restraints to be relaxed sooner than later, with higher risk individuals maintaining quarantine. The government can mitigate the impact of vast social issues that are arising from an extended lockdown by loosening current restraints. Behavioural changes don't need to be mandated to be followed, for instance, the past impact of SARS affected social behaviour in the hardest-hit nations leading the widespread voluntary adoption of wearing face masks in public.
Over the past 2 weeks, we have been selectively increasing our equity weighting with a focus on quality. Markets always move in anticipation of change and the seeds of every bull market are sown in times of uncertainty.
We discuss 3 of our new positions in a recent podcast which can be found here: https://bit.ly/Datt-Media
Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should
not be construed as advice in any way
Emanuel recently was interviewed by two of Australia's best known financial podcasters, Alan Kohler and Owen "Rask" Raszkiewicz.
The links for both interviews can be found via the following links:
Alan Kohler - "A barbell approach to investing" (subscriber only) - https://bit.ly/Datt-Kohler
Owen Rask - "Stock Pick: Emanuel Datt | Datt Capital" - https://bit.ly/Datt-Rask2
We are finding many attractive opportunities to deploy capital in this market, in companies both large and small. This 'risk-off' environment has thrown up a variety of bargains which we have started to selectively invest in, this may be an opportune time to consider an investment into the Fund.
Investors and potential investors should be aware that performance fees will only be applicable should we achieve a return of approximately 25% above the Fund's current net asset value; whilst reiterating that we are the Fund's largest investor providing direct alignment with other investors.
We welcome any enquiries which can be lodged via this link: https://bit.ly/Datt-Investor